Should fans play a greater role in the ownership of English & Welsh football clubs?

Published 02 June 2015 | Authored by: Kevin Jaquiss

This article looks at the current governance structures of English and Welsh football clubs, and asks whether greater levels of fan ownership and participation could improve their stability, vitality and overall performance.

 

How governance and ownership structures have evolved

Much has been written1 about the “fit and proper person test”, now technically the “Owners’ and Directors’ Tests”,2 which apply through The FA to all clubs in the Football Conference, Isthmian League, Northern Premier League and Southern Football League and through The Football League and Premier League.

While not identical, the tests in broad terms prevent people who have been involved in corporates insolvencies, have been convicted of serious criminal offences or have committed serious breaches of The FA or League rules from being involved in the ownership or management of football clubs.3

The problem with the tests is that they encourage us to think that good governance in football depends upon the ethics of the individual who controls the club. The stories about people who have fallen foul of the test, and those who should have done but didn’t, are fine for frightening the children or amusing the fans of rival clubs, but they are not the whole story about football governance.

 

From community organisations to de facto PLCs

In England and Wales, football clubs mostly started as community organisations, along the lines of local sports clubs today, operating as unincorporated associations or community benefit societies4 with people who played for the teams as members.

When professional football began to emerge in 1899, The FA, as the federal body of the clubs, took steps to protect the clubs’ heritage of benefiting their members and communities. What became Rule 34 of the FA’s Rules allowed clubs to be limited companies but prohibited payments to directors and restricted dividends and payments to owners on winding up. This last part of the rule survives in the present FA Rules, which provide that any surplus on a winding up has to go to a benevolent or charitable organisation.5 The rest, preventing payments to directors and dividends, has disappeared; the result being that there are now no limits imposed by the football authorities on what a trading football club can or cannot pay to its directors in salaries and bonuses, and to its owners in dividends.

The change from community organisation to limited company was a dramatic one, although its consequences played out slowly. The next major step came in 1983, when The FA permitted Tottenham Hotspur to make the club (a private limited company) the subsidiary of a public limited company (PLC), which would be floated to raise capital on the public markets in return for a share in the profits generated by the club. Other clubs such as Aston Villa, Manchester United and Newcastle United followed suit, and the holding company model is now commonplace, whether or not the shares are publicly traded, as it permits owners to take profits out of trading football clubs.

Why the changes occurred and what it meant for fans

The transition of clubs to a structure permitting them to return profits to their owners happened at a time when football desperately needed investment,6 although it is hard to argue with the proposition that the holding company structure was a crude device to get round the effect of Rule 34, which the FA could have prevented.7 The result of the newly permitted structure was that football clubs took a further step towards becoming purely business assets like any other and tended to be managed as businesses – the corporate model is predicated on the over-riding commercial interests of owner shareholders and it is to them that the directors owe duties.

It follows from this that fans came to be regarded as consumers to whom the commercial owners of the club sell tickets, match day entertainment, replica kits and media packages. This is something that The FA thought it important to prevent until 1983,8 and in the view of this author it is undeniable that something in football has been lost as a result of the transition. Part of this is nostalgia for the days when clubs were the centres of working communities, but there are harder edged questions to be asked in a world in which football globally is more successfully financially than ever before. Why, against this background, are there so many insolvencies and so many crises at individual clubs? Why has it been necessary to expand the Owners and Directors Tests over recent years? Why is football at grass roots level under threat in so many places?9 The next section looks at whether giving fans a greater role in ownership is a potential means of addressing some of these issues.

 

Should fans play a greater role in ownership and governance?

There are examples of clubs run for profit that see good relations with their fans and their community as a key objective and deliver on it successfully.10 In this author’s view, if this approach was more universal and deep rooted, the quality of governance in football would be improved.

The reality: football is different to normal businesses

Football clubs are unlike normal businesses because fans are largely stuck with their team, however dire the performances on the pitch. To this degree, fans are not consumers in the normal sense of the word.

In the author’s experience, fans’ loyalty is firmly connected to ideas of ownership and shared identity. They keep going to games or looking out for the scores because it is “their team”. Listen to almost any football phone in about a club facing disaster and you will likely hear fans making the point that they will still be there, whoever owns the club. The relationship is a deeper relationship than that generated by financial ownership. This perhaps informs the sometimes fraught relationship between clubs and fan groups about ticket prices and the constant hum of resentment about the proliferation of replica kits and new versions of replica kits. And it shows itself in times of crisis in calls to remove the owners of the club.

In the author’s opinion, a model of club ownership that is more in tune with this underlying perspective of the fans would tend to be more successful and sustainable than one that runs counter to it.

In Germany, under licensing arrangements operated by the Deutsche Fussball Liga, football clubs have to be 51% owned by their fans and investment is secured through the sale of commercial rights. The German system reflects an understanding that it is healthy for fans to own clubs as it exploits the powerful symbiotic relationship between fan and club. Fans want the club to survive and prosper; giving them a role in a more representative governance structure helps to avoid the damaging scenarios which can be precipitated by the ambitions and limitations of individual owners. It also cements their engagement with the club, which in itself increases commercial stability.

The legalities of fan ownership in England & Wales

Moves towards fan ownership are also occurring in England and Wales. One indicator of this in the recent history of FC United of Manchester11 (details below), which has placed fan ownership at the centre of its governance strategy and has seen attendances grow to the point at which the average gate is 2,000 in the Evostik Northern Premier League; only one other team in that league has an average gate over 500.12

The club proves that ownership does matter and that fan ownership is a powerful thing. We will return to FC United below as an example of a structure that allows fans to take complete (or partial) control of a club; but first the author would like to touch on two other ways in which current corporate models could better facilitate the concept of fan “ownership”.

Awareness of what it is fans regard as important

The analysis that fans feel themselves to be owners is not always related to direct and outright commercial ownership. In this author’s view, fans (or most fans) do not want to own their club as a commercial asset or run it as a business. What they feel they own, and what they feel no one should interfere with, is the history and heritage of the club – the club colours, the stadium, the name.13

There are, therefore, things that clubs could do to recognise the importance of fan “ownership” in this sense without parting with a single share. At its simplest level, this involves active engagement with the fan base, which carries with it tangible benefits for the club. For example, providing information to fans about the club’s progress as a business makes decisions easier to justify and manages expectations. Engagement with fans also makes the club’s community work and its involvement in grass roots football more accountable and potentially more productive.

The right to voice on important issues

A more radical approach involves clubs giving fans a voice, or even a veto, on changes that impact on the club’s heritage. Mechanisms for this, such as staged levels of influence for supporter groups depending on their membership and governance, were suggested in evidence to the Culture, Media and Sport Select Committee Inquiry into Football Governance.14 This could be done on a voluntary basis through a public commitment made by the club’s owners, but a more enduring and meaningful legal solution would be a “golden share” held by an appropriately constituted and credible supporters group meeting specified legitimacy criteria. The share would not carry any significant financial or commercial rights but would give the supporters group (so long as it continued to meet the legitimacy criteria) a meaningful voice – up to and including a veto - on key pre-defined issues.

The Select Committee’s report recognised the importance of fan engagement and made a number of specific recommendations about ways in which supporter ownership might be facilitated and encouraged. Progress on those recommendations was reviewed by the All Party Parliamentary Group for Mutualslast year and they concluded that not enough had been done and, in particular that “Football authorities should adopt a policy of promoting supporter involvement and ownership in football clubs as a strategy for building trust and confidence for the long term”.15 This could be done through changes to League rules or through a licensing system. The report betrays a degree of impatience with The FA and other football authorities for their resistance to this agenda and calls for a stronger line to be taken by Parliamentarians with the threat of legislation if nothing is done.

All of this will take time and is subject to the vagaries of the political process. Not everyone is waiting for a solution to be presented to them. The next section gives examples of fans working together to develop their own solutions.

Outright fan ownership: the community benefit structure

FC United of Manchester are about to move into their new stadium, over £2M of the cost of which was met by fans who bought shares in the club.

The club is a community benefit society (registered under the Co-operative and Community Benefit Societies Act 201416) and operates on a one member one vote basis with an elected board which oversees the work of paid and unpaid staff. Community benefit societies, like co-operatives, are owned by their members but the shares do not represent a share in the underlying assets; as a condition of registration with the Financial Conduct Authority (which acts as registering authority under the legislation) the assets of a community benefit society have to be used to benefit an identified community, in the case of FC United the community served by the club. FC United has also chosen to adopt the “asset lock” permitted by the legislation,17 which means that the restriction on the use of its assets cannot be removed by resolution or by changes to the legal form of the club.

Individual fans spent between £200 and £20,000 in response to a share offer by FC United, which had features unique to the community benefit society model:

  • As previously mentioned, the shares did not give shareholders a share in the underlying assets of the club;
  • Their entitlement was to interest only; the rate of interest was limited and the club gave no guarantee that interest would ever be paid;
  • The club maintained its statutory commitment to community benefit; interest could only be paid to the extent that this could be done without preventing the club delivering on its commitment;
  • Whatever number of shares someone bought, they still had just one vote as a member of FC United.

The share offer document studiously avoided use of the word “investment” and for good reason. The terms on offer did not represent a sound financial investment. But people were not looking for a return or even for influence based on what they put in. They believed in what the club was doing, they were prepared to give it the use of their money and, above all, they wanted to be part of it – to have a stake, to be, collectively and equally with other supporters, owners.

On the other hand, people who paid tax were able to take advantage of the Enterprise Investment Scheme (EIS), designed by the Government to support new enterprises and now joined by Seed Enterprise Investment Scheme (SEIS). These both provide significant (up to 50% of the value of the investment) tax relief. They were not designed with community benefit societies in mind but HMRC and the Government have readily accepted that developing supporter ownership is a worthwhile application for them.

The model makes supporter ownership a powerful force, crucially linked to the idea that the club should have a positive role to play in its community. The attendance figures set out earlier reflect the strong sense the members of FC United have that it is, in every sense of the word, their club.

The unique form of ownership, which is not an ownership of a financial asset and in which all members share equally on a one member one vote basis, reflects the feelings fans have and share about the club they support. Fans in FC United have readily, and, as a collective, rejected the idea of taking money from a rich owner to win promotion (though this author suspects that the club’s supporters would not want this article to omit recording that FC United were 2014/15 Champions of the Northern Premier League and will play next season in the Conference North). Their wish to own their club and their wish to ensure that their club survives come together to support a prudent and sustainable approach to financial management. They act together as representatives of the community served by the club and hold the board and staff to account for the commitment to deliver benefit to the community.

It will rightly be said that all this is very well in the Evostik Northern Premier League with a group of highly motivated Mancunians who set off on a mission to show that there is an alternative to big money football. It would not be possible in normal circumstances to use the community benefit society model to take over a Premier League or Championship club; the sums of money involved, represented by assets or by debt, tend to be larger than can be raised from fans in the time available when the chance to acquire a club arises.

Partial fan ownership: buying shares in the existing club

There are, however, examples of fans taking minority share stakes at clubs such as Portsmouth when the boom and bust culture which can affect clubs at this level opens up opportunities; in this case the appointment of an administrator.18

The issue that often has to be addressed is how the rights and interests of high net worth individuals who step in with significant funding to support a takeover are balanced with those of the wider fan base. Weighted voting and shareholder agreements provide straightforward mechanisms for this and mean that forms of fan ownership could flourish at all levels of the football pyramid. At Portsmouth, the supporters trust (a community benefit society like FC United) has raised money from fans to buy shares in the club and has the right to buy further shares over time. A shareholders agreement provides for increased influence for the trust as it acquires more shares.19 Depending on the people involved as main funders and the extent and purpose of their individual investments, there is a range of options to give influence for fans within this overall structure, including the “golden share” model mentioned above. As a matter of basic principle, anyone taking over a football club would be well advised to take account of the different ways of looking at ownership and engagement with supporters set out in the previous section.

Thanks to clubs like FC United, the ideas of structuring a football club around fan (rather than shareholder) ownership are no longer regarded as fanciful. Figures published20 by Supporters Direct21 suggest that there are 30 community owned clubs in England and Wales and a further 46 clubs in which fans have a shareholding. The clock is not going to be turned back and not all clubs are going to be owned by fans, but there are things to be gained for all clubs from thinking about fans as owners.

 

Pros and cons of fan ownership

Do fans possess the relevant skills?

A lot of the debate about fan ownership in recent years has been conducted at a simplistic level. It has been suggested that football fans are too inexperienced or addled by alcohol to be able to understand what is involved.

In the author’s opinion, however, the financial history of football clubs in recent years does little to suggest that board standards are high.

Furthermore, in the author’s experience, fans groups looking at a takeover often have wider skills and experience than the board of the club they support. It will be important, however, to ensure that the governance structure of a supporter owned club involves the appointment of a board selected for skills and experience, rather than the election of a board composed solely of fan representatives.

Are fans only motivated by on-pitch success?

A more subtle argument is that fans are motivated only by on-pitch success and will use their rights as owners to force the club board into speculations on expensive new players or a sale to the next entrepreneur claiming to have the resources and commitment to take the club up through the leagues.

The decision by the supporters trust at Notts County to sell its 60% stake in the club to a Middle Eastern consortium was an example of how this can happen and how badly things can go wrong. Munto Finance set out ambitious plans, appointed Sven-Goran Eriksson as a League Two manager, signed some big player contracts then sold out for a nominal sum after 5 months, leaving the club with £7M of debt.22 This doesn’t make fan ownership worse than any other ownership but it demonstrates the importance of the underlying principles set out in this article. Fan ownership only really makes sense if it is an alternative to “boom and bust” ownership, based on fans’ commitment to the survival of the club and its place in the community; survival is ultimately more important than success. The various mechanisms identified in this article, including the “golden share” approach to protecting the heritage and shared identity of the club, represent potential ways of harnessing the commitment of fans in a way that, in the view of this author, would be healthy for clubs and for football as a whole.

Problems around practical implementation

Perhaps the biggest issues with fan ownership are practical ones. Often, fan ownership only comes onto the agenda at a club in the face of impending or actual financial disaster, as at Portsmouth. This is understandable but it can be extremely difficult to make fan ownership a reality within a timescale set by insolvency procedures.

There will continue to be opportunities as clubs lurch from one crisis to another and fans start new clubs at grass roots but what is really required is a new appreciation of fan ownership as a means of delivering stability and responsible governance in football.

 

Looking forwards: what might happen?

The report of the All Party Parliamentary Group for Mutuals (see above) criticised the “neutrality” of the football authorities on issues of ownership.23 The Group accepted the argument that fan ownership is inherently healthy from a governance point of view and should be encouraged.

If the football authorities responded favourably to this encouragement, constructive engagement with supporter groups would be a requirement for league clubs, perhaps underpinned by a new licensing regime. Clubs would support the development of credible, legitimate and properly governed supporters groups that would be granted higher levels of involvement and influence the wider their member base became. Change would be gradual rather than crisis driven.

If the authorities do not respond constructively, the same result might be achieved through a football regulator put in place by Parliament – that seems the most likely form of legislation if the threat issued by the All Party Parliamentary Group for Mutuals is ultimately carried out.24

If clubs become more open to supporter involvement, supporters and supporter groups will need to respond in a constructive way; fan groups will have to be prepared in some cases to tone down their rhetoric about the directors and owners of the clubs they support if they want to be part of a new governance structure.

There needs to be models for properly governed supporters groups and those groups need support in their development. Supporters Direct, which was set up with Government support in 2000 to be a catalyst for the development of responsible supporter involvement in the running of football clubs, has been astonishingly successful in promoting the supporters trust model (there are 147 in England and Wales25) but, in the absence of encouragement or active engagement from the football leagues, there is some way to go on the long term aim of changing the governance of football. Part of this is a funding issue (Supporters Direct is ultimately funded by the Premier League and has not enjoyed stability in its funding regime) but the wider relationship with football leagues and football clubs is crucial.

The sense of ownership that fans have in their club is something we should treasure; properly understood, it is a means of achieving sustainability and effective governance in football. The good examples of full supporter ownership such as AFC Wimbledon, Exeter and FC United show the business potential; these are well-run and successful clubs that enjoy not just loyalty and financial support from their supporters but also practical commitment from those who volunteer their skills, experience and hard work.

The governance potential exists for all clubs. Barcelona President Josep Maria Bartomeu was recently quoted in The Independent talking about the way the club’s 144,000 fan owners vote in elections.26 He said “They vote with the heart of a fan and the head of an owner… If you are just a fan you only use your heart; if you’re just an owner you only use your head.” Engaging fans’ heads as well as their hearts is a sound strategy for the long term. Clubs that are rooted in their communities and open with their communities about their finances and activities are much less likely to fail than clubs that operate behind closed doors. The means of achieving this are there – we just need the courage and the imagination to use them.

 

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About the Author

Kevin Jaquiss

Kevin Jaquiss

Consultant and member of DWF Sports Group Core Team.

Kevin received the Financial Times Innovative Lawyer of the Year 2010 award for his work with FC United in developing the means by which £2M has been raised from supporters to fund the club’s new stadium development.

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